Please ensure Javascript is enabled for purposes of website accessibility

Could Intuitive Surgical, Inc. Be the Next Great Dividend Payer?

By Brian Stoffel - Sep 29, 2016 at 9:01PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

It could, but it's not a basis for an investment... yet.

Image source: Getty Images.

During last quarter's conference call for Intuitive Surgical (ISRG 0.43%), a funny thing happened. Analyst Robert Adam Hopkins asked Intuitive CEO Dr. Gary Guthart about the company's "eye-popping" amount of cash on the balance sheet.

Guthart responded that the company is looking to reinvest that cash back into the business, explore potential mergers/acquisitions, consider buying back company stock, or [gasp] pay a dividend. For a fast-growing tech company in the healthcare field, paying a dividend would seem odd, but Intuitive's rapidly growing cash balance doesn't lie -- the company has been minting money.

Data source: SEC filings. Includes cash, short- and long-term investments.

To me, reinvesting in the business and paying a dividend make the most sense for Intuitive. While there certainly are smaller acquisitions that could help the company out, large splashes in the M&A pool rarely ends up being good for shareholders. And with the stock trading for 40 times earnings, buybacks don't make much sense, either.

How much could Intuitive afford to pay out?

Of course, cash alone isn't enough to pay a dividend. A company needs to have strong free cash flow (FCF) to pay its shareholders. Here's what Intuitive's FCF has looked like since 2007.

Data source: Yahoo! Finance.

As you might have seen with Intuitive's cash hoard, the company was hurt in 2013 and 2014 when the Affordable Care Act went into affect, and hospitals began to tighten their purse strings. Since then, however, they have flocked to the company's new Xi machine, and the number of operations in U.S. General Surgery has boomed -- creating lots more cash flow for the company.

If Intuitive were to start paying a dividend, the management likely wouldn't go beyond a payout that ate up 50% of the company's FCF. That equates to about $426 million right now -- which is equal to $11.07 per share. Given today's price tag, that's a 1.54% dividend yield.

Such a yield isn't enormous, but it's important to take the long view. As Intuitive's installed base of machines grows, it is recurring revenue -- the disposable parts that surgeons must order for each operation -- that will provide the lion's share of sales. These offerings have higher margins than machine sales alone, similar to a razors and blades model.

Of course, the daVinci will have to continue proving its usefulness in evermore procedures to drive recurring revenue growth. It has already done that with hernia operations, and it hopes to make headway with colorectal and thoracic procedures, as well. If the company succeeds in these endeavors, FCF should experience a steady rise, meaning even higher payouts in the future.

Of course, I wouldn't suggest an investor buy Intuitive Surgical today just for the possibility of a dividend payment. But it's something that current shareholders should keep their eyes on, as it would be an excellent kicker for a solid investment.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Intuitive Surgical, Inc. Stock Quote
Intuitive Surgical, Inc.
$219.07 (0.43%) $0.93

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/21/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.